Answer:
14.29%
Explanation:
Calculation of the IRR for this project
First step is to find the depreciation
Each year depreciation will be :
$485,000/5=$97,000
Second step is to calculate for the Operating Cash flow for each year
Using this formula
Each year OCF=(Sales-costs)*(1-Tc)+Depreciation*Tc
=$140,000*76%+$97,000*24%=$129,680
Therefore in n five years, the after-tax salvage will be calculated as:
$35,000-($35,000-0)*Tc=$26,600
Hence in year 5, total cash flow will be:
=$129,680-$60,000+$26,600=$96,280
For the year 0, the total cash flow i will be:
-$485,000+$60,000=-$425,000
Last step is to find the NPV
Let NPV=-$425,000+$129,680/(1+IRR)^¹+ $129,680/(1+IRR)^²+ $129,680/(1+IRR)^3+$129,680/(1+IRR)^⁴+ $96,280/(1+IRR)⁵=0
IRR=14.29%
Therefore the IRR for this project will be 14.29%
